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MLR - PMP 3/24/14

Major averages fell Friday on heavy triple witching volume. The NASDAQ Composite was notably weaker than the S&P 500 due to the selloff in biotechs. The biotech weakness was due in part to Congress asking Gilead (GILD) about the pricing of its Hepatitis-C drug. However, GILD was showing sharp weakness in recent weeks prior to Friday's news when it failed on a late-stage breakout attempt and violates its 50-day moving average the previous week while other leading bio-techs such as Celgene (CELG) and Pharmacyclics (PCYC) have failed on recent breakout attempts as well. Biotechs have been a leading sector for months so a fairly steep pullback on perceived negative news for the sector is not unwarranted, but certainly does not indicate that one should continue to hold any bio-tech stock if in fact it has triggered a bona fide sell signal and/or moving average violation.

But another reason for market weakness may be due to the Fed's leading lady Janet Yellen who said she may raise the federal funds rate “around six months” after the asset purchase program ends. Stocks initially fell on the news then stabilized. Of course, the question of when the asset purchase program ends is related to the recovering economy. If recovery is delayed, tapering will also be delayed, which will push out the timeline on quantitative easing. The Fed is naturally looking for a soft landing but unlike in the 90s when they were able to achieve it, the Fed is up against a far greater level of debt which can erode the dollar, send inflation higher, and thus minimize the benefit of any economic recovery. Further, as interest rates move higher as they normally will during a new economic growth cycle, the level of debt that the debtor nations including the US, UK, and Europe must service is far greater. This can shorten the lifespan of the new cycle.

As always, price/volume of leading stocks and major indices will be our guide. Some biotechs have taken nasty downturns off peaks, and in this market environment, it is often better to sell into strength or keep stops tighter than usual if selling into weakness.

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